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Agency Theory, Corporate Governance and Dividend
Payout in New Zealand
Travis Brown Department of Accountancy and Finance
University of Otago
Helen Roberts† Department of Accountancy and Finance
University of Otago
15 December, 2016
JEL Classification: G34, G353
Keywords: Corporate governance, Agency theory, Dividend payout,
____________________ †Footnote the corresponding author and also any acknowledgements from presentations and input that other seminar participants have made.
Abstract
This paper examines the effect of internal corporate governance on the likelihood and the level
of dividend payout in New Zealand. We find a positive relationship between the level of
dividend payout and internal corporate governance. Interestingly, our results also support a non-
linear relationship between dividend policy and beneficial director ownership levels. We find
evidence to suggest that lower dividend payout coincides with decreasing agency costs arising
from increased director-shareholder alignment for beneficial director share ownership less than
26%. The relationship becomes negative when ownership exceeds 56%. The high levels of
ownership invoke managers to invest surplus cash to maximize firm value, with dividend policy
acting as a substitute for director oversight. Entrenchment exists for ownership levels between
26% and 56%. We also find that external ownership combined with strong board governance
may mitigate agency problems.
1. Introduction
Given New Zealand’s (NZ) climate of strong investor protection, we examine if there is still a
reliance on dividends to substitute for poor corporate governance.1 This study investigates
internal corporate governance and the consequential effects upon the dividend payout levels of
NZ firms. Consistent with Harford and Maxwell (2012) and Agrawal (2009), we report that
investors do not need to rely on dividends to compensate for a lack of good corporate
governance. Specifically, higher levels of dividends occur in conjunction with stronger board
governance and a less influential CEO. This results contrasts with earlier work by John and
Knyazeva (2006) who report that dividends act as a substitute for weak governance.
While corporate governance as a determinant of dividend policy is documented in the
literature (John and Knyazeva, 2006; Rozeff, 1982) this relationship has not been examined in
the NZ market. In particular, given the openness, relative efficiency, and free flow of
information and capital flows of the NZ stock market, it provides a unique diversification
opportunity for international investors seeking dividend income (Tajaddini, Crack and Roberts,
2015). It is worth noting that the NZ corporate finance environment is regulated by the NZ
Stock Exchange and the Financial Markets Authority. CEOs of listed firms may also be
directors, however following the introduction of the Best Practice Code in 2004, CEO-Chair
duality is no longer permitted. This contrasts with publicly listed firms in the US where the CEO
is also a director. CEO board involvement in NZ is quite heterogeneous with some CEOs
choosing to have no board involvement at all. Mean CEO board participation for our sample is
66%. The variation in CEO board involvement provides a richer dataset for testing the
association between governance and dividend policy.
Internal governance across NZ listed firms may also vary. The small population means there
is a limited pool of director/managerial talent and while directors have roughly the same number
of directorships as other comparable countries, they have a higher proportion of unlisted
directorships (Boyle and Ji, 2013). Given the higher average number of firms that directors need
to monitor, the time and effort given to each directorship may be less. Conflicts of interest can
also arise due to cronyism between directors and CEOs (Ryan and Wiggins, 2004). Collegial
boardroom pressure and an expectation of maintaining the status can also lead to complacency
and a willingness to simply approve majority recommendations (Main, O’Reilly and Wade, 1995).
This behavior can lead to boards becoming more even more influenced by CEO
1 Porta et al (1999) found New Zealand was one of many countries that exhibited strong investor protection - proxied by an anti-director index
recommendation, including the approval of dividend decisions that are sub-optimal for investors.
Such decisions may be associated with weak internal governance and compromise shareholder
value.
2. Background material and extant literature
Dividends have been explained as a means to communicate information to shareholders or to
satisfy payout demands from heterogeneous dividend clienteles (Allen and Michaely, 2003).
However, further work by DeAngelo, DeAngelo and Skinner (2004) questions both the signaling
and the clientele considerations, after reporting dividends being paid by a small number of large
US firms. DeAngelo and DeAngelo (2006) then propose an alternative view whereby the need to
distribute the firm’s free cash flow drives the optimal payout policy. Incorporating agency theory
(Jensen, 1986) with evolution in the firm’s investment opportunity set (Fama and French, 2001;
Grullon, Michaely and Swaminathan, 2002) they propose a life-cycle theory where firms alter
dividends through time. Evidence consistent with the life-cycle approach confirms a positive
relation between the propensity to pay dividends and the ratio of retained earnings to total equity
(DeAngleo, DeAngelo and Stulz, 2006). However, none of these theories can explain the
reported decline in the residual propensity to pay dividends in the US (Fama and French, 2001).
Denis and Osobov (2008) provide additional evidence that the mix of earned to contributed
equity determines dividend policy for developed markets around the world but does not support
signaling as a determinant of dividend policies.2 In particular, the concentration of dividends
among the largest, most profitable firms is consistent with the life-cycle theory prediction but
contrary to the signaling and clientele explanations. We extend this literature by examining the
effect of internal and external corporate governance on the likelihood and level of dividend
payout in NZ. Agency theory suggests that firms pay dividends to mitigate the costs associated
with suboptimal managerial behavior. Dividends reduce firm free cash flow, restricting cash
available for discretionary spending by managers (Jensen, 1986). Firms with high managerial
ownership experienced increased alignment, lowering agency costs (Jensen and Meckling, 1976).
Dividends also force managers to raise investment capital in the external markets, subjecting
managers to additional monitoring by investors and investment banks.
2 The study uses data from Worldscope over the period 1989 – 2002 but due to data limitations Denis and Osobov (2008) only performs tests using dividend data for the United States, Canada, the United Kingdom, Germany, France and Japan.
Corporate governance may also affect the alignment of shareholder-manager interests. Internal
governance refers to the composition of the board and firm ownership. External corporate
governance refers to the managerial labour market and the market for corporate control
(takeover market). Corporate governance can be viewed a substitute device for the monitoring
aspect of dividend policy (Rozeff, 1982).
Dividends may act as a substitute for good corporate governance because cutting dividends is
costly for the firm (Jensen, 1986), dividends require effort to be maintained, and they create an
effective pre-commitment policy. Two competing hypotheses concerning the relation between
agency theory and dividends exist (La Porta et al., 2000). Under the outcome hypothesis small
shareholders under strong investor protection may pressure managers to pay out earnings. This
implies that better corporate governance is associated with higher levels of dividends. Evidence
of a positive association between investor protection and dividends supports this view (Agrawal
2009). Conversely, the substitution hypothesis proposes that dividends reduce agency costs and
require more frequent external financing. The benefits of decreased agency costs are traded off
against the monitoring costs due to the increased use of capital markets (Rozeff, 1982). Chae et
al. (2009) show that firms with lower external financing constraints tend to increase the payout
ratio and experience an improvement in their corporate governance. They find that governance
is reversed depending on the relative sizes of agency and external financing costs. John and
Knyazeva (2006) report that if dividend policy is set to maximize shareholder value, dividend
payout should decrease with the strength of corporate governance.
Good governance limits the potential for managers to act sub-optimally, lowering agency
costs and the dividends required to mitigate them. The empirical literature also supports two
alternative results. First, managers may become insulated from internal disciplining mechanisms
when there is higher insider (executive) ownership or weak corporate governance (Farinha,
2003). Entrenched managers can cause deviations in optimal payout policy by preferring to pay
lower dividends to avoid raising funds in the external capital markets and outside monitoring. If
dividend policy is used to monitor entrenchment-related agency costs, a positive relation
between insider ownership and dividend policy is observed (Weston, 1979; McConnel and
Servaes, 1990). A negative relation implies that ownership and payout are substitute mechanisms
to reduce suboptimal behavior (Hu and Kumar, 2004). Farinha (2003) identifies a U-shaped
association characterized by a critical level of entrenchment for managerial holdings at 30%.
Further evidence endorsing dividend policy as a disciplining mechanism in countries with
different legal systems and distinct agency problems shows the relation between dividends and
insider ownership following the pattern negative-positive-negative in firms with an Anglo-Saxon
tradition (Farinha et al., 2009). Second, institutional ownership may force firms to pay higher
dividends (Short et al, 2002). This result is consistent with both the agency perspective and
institutional investors preferring to free ride on other external monitoring activities. Conversely,
Zheckhauser and Pound (1990) report that institutional ownership is an effective monitoring
mechanism. Overall the evidence shows that insider ownership can align shareholder and
manager interests up to a critical ownership level. Additional evidence shows that board
independence affects dividend policy but is not a substitute control mechanism (Young, 2000).
3. Data and Sample Selection
We obtain board and ownership data and financial data from company annual reports. Market
capitalization, data for dividend policies, earnings, sales, takeover bids and substantial security
holder ownership is sourced from disclosures on the NZX Research database which provides
information on publicly listed NZ firms. The sample includes all firms listed on the NZX from
2004 – 2012 for which data on corporate governance and dividends are available. Financial and
regulated utility firms have been excluded. Firms with a negative dividend payout ratio are also
excluded. The definitions of all variables are given in Table 1. The summary statistics for the 563
firm-year observations in the sample are reported in Table 2.
[Insert Table 1 here]
[Insert Table 2 here]
The data in Table 2 shows that 80% of the firms in the sample pay a dividend and the mean
dividend payout ratio is 52.7% for the three-year average payout period ad 49.0% for the five-
year average payout period. The maximum dividend payout for both these periods is greater than
one. This is a reasonably common observation in NZ and is predominantly the result of unusual
and excessively low earnings while keeping dividends constant. The CEO is a member of his
own compensation committee 11% of the time and CEO board members account of 66.4% of
the sample. CEO Chairman is quite uncommon, making up only 1.8% of the sample. Average
board size is six directors. Busy directors account for 61% of the sample. Inside and block
owners make up 17.1% and 27.7%, respectively. Mean institutional ownership is quite small at
only 5.7%. Mean director share ownership is 15.7% while combined block and institutional
owners account for a mean of 33.4% of shares held. CEOIND has a mean value of 0.736,
ranging from 0 to 1. On average CEOs appear to be less influential and therefore represent a
higher level of internal governance for firms. Board influence, BD_IND takes a mean value of
0.431. The lower measure indicates that there may be traits associated with weak governance in
relation to a firm’s board of directors. The mean market-to-book ratio is 2.32; the mean growth
in sales is 12.6%. These values suggest that firms will need to access the capital markets regularly
to sustain the current growth trajectory. The low value for the CORP variable, mean = 0.2149,
indicates there is very little external disciplinary effect by the way of takeover threats for the
sample.
Table 3 reports the correlation coefficients between the independent variables. The positive
correlation between the propensity to pay (DIV) and board size is consistent with the positive
correlation between firm size and board size (0.56). There is also evidence that the likelihood of
paying out dividends decreases when a firm has higher growth opportunities. The opportunity
cost of paying dividends will be higher in this case and the cash may have a higher value if is
reinvested into the business. The corporate governance proxies indicate that if the directors are
busy and there is a lack of institutional ownership, the firm is more likely to pay a dividend as
summarized by BD_IND. The negative correlation between CEO_IND and the likelihood of
paying a dividend implies that as CEO influence on the board decreases, the level of dividend
increases.
[Insert Table 3 here]
Table 4 reports the summary statistics and the result of the t-tests for differences in the means
across varying degrees of institutional (INST) and block ownership (BLOCK). The varying
degrees of external ownership are compared to the base case of both blockholders and
institutional holders present. The propensity to pay dividends ranges from 77.09% (both block
and institutional holders) to 83.3% (only institutional holders). This difference is statistically
significant. Mean director beneficial ownership (BODOWN) is lower for firms with only
institutional shareholdings (4.76%) compared to those with only blockholdings (18.56%). Board
governance (BD_IND) is higher for firms with no block or institutional holdings. Institutional
ownership is significantly higher when there are no blockholdings and vice versa.
[Insert Table 4 here]
4. Methodology
4.1 Hypothesis development
Firms can alter the governing board and the ownership structure to suit their specific needs.
Variation in firm ownership structure and board composition may be related to different levels
of agency costs. These decisions make up the internal governance of the firm. We examine the
relation between internal governance and dividend policy.
Research Question I: Does internal corporate governance affect the dividend decisions of NZ
publicly listed firms?
Research Question II: Is there an empirical relationship between the strength of internal
corporate governance and the level of dividend payout for NZ publically listed firms?
Firms with weaker governance are more likely to pay higher levels of dividends as they are
subject to higher agency costs (John and Knyazeva, 2006). Higher dividend payments act as a
substitute for good governance. Firms with stronger governance will be less likely to pay
dividends (John and Knyazeva, 2006). We expect to find a negative relation between the level of
dividends and the strength of internal governance.
Hypothesis Ia: Firms with weaker levels of internal corporate governance will exhibit a greater
tendency to pay dividends than firms with stronger internal corporate governance.
Rozeff (1982) reports a positive relation between dividend payout and agency costs. Higher
agency costs associated with weaker internal governance are mitigated by higher dividend payout.
Dividends can compensate for a lack of monitoring, discipline and misalignment of interests that
are evident in firms with weak governance.
Hypothesis IIa: As a firm’s internal governance increases, the level of dividend payout
decreases.
The managerial entrenchment hypothesis refers to managers in positions that are relatively safe
and secure. There is little threat of takeover and these firms typically have weaker governance
embodied by a lack of monitoring by blockholders and institutions. Entrenched managers may
be less willing to pay dividends for fear of scrutiny by capital markets. However, a firm with
strong corporate governance will, in theory, pay more dividends. This positive relation between
managerial entrenchment and dividend payout has been documented in several studies including
Farinha (2003), Brown and Caylor (2004), and Kowaleski et al. (2007). Agency costs may also
increase with greater entrenchment exposure. A dividend policy can help to alleviate these costs.
Dividend payout theory states that the relation between internal governance and propensity to
pay dividends should be positive. This leads to the following hypotheses:
Hypothesis Ib: Firms with weaker levels of internal governance will exhibit less of a tendency
to pay dividends than firms with stronger internal governance.
Hypothesis IIb: As a firm’s internal corporate governance increases, the level of dividend
payout increases.
The external corporate governance environment may also impact these hypotheses. In support
of Hypothesis Ia and Hypothesis IIa, the transparent nature of the managerial supply market
means that there could be a stronger disciplinary effect present. Managers may feel more
compelled to act in the best interests of shareholders and payout dividends when the internal
corporate governance is weak. Alternatively, because the managerial supply market in NZ is
smaller compared to other developed countries, there may be an entrenchment effect. In this
case managers may feel more secure in their respective roles and seek to maximize personal
interests. This view is consistent with the non-optimal dividend payout predicted in Hypothesis
Ib and Hypothesis IIb.
4.2 General Model Specification
There are two parts to the analysis. The first relates to research question one, the second to
research question two.
Research Question 1.
We propose the following logit model to examine whether internal corporate governance affects
the dividend decisions of NZ listed firms. The model explores the determinants of the
probability that a firm pays a positive dividend against the probability that a firm pays no
dividend.
ln � ������������
=
��+�����_����+����_����+��������� !�+�"����#�� +$%��&�'()��+$*'�(�+$+��',�+$- �.��+$/0��+$��,)'�#!1�+$���� ,�' � +2� (1)
Research Question 2.
We employ the following OLS multivariate regression model to investigate the relationship
between the strength of corporate governance and the level of dividend payout for NZ publicly
listed firms.
��&,(3� =$�+$����_����+$���_����+$�������� !�+$"����#�� +$%��&�'()��+$*'�(�+$+��',�+$- �.��+$/0��+$��,)'�#!1�+$���� ,�' � +2� (2)
4.3 Dependent Variables
DIVPAY is the ratio of total annual ordinary cash dividends to normalized after-tax earnings.
DIVPAY is zero when no dividends are paid and one in the case of 100% of after-tax earnings
are paid out in the form of dividends. DIVPAY is truncated below zero to account for negative
dividend payout. Consistent with Chae, Kim and Lee (2009), the results include those cases
when the dividend payout ratio exceeds one. Bae, Chang and Kang (2012) find evidence that NZ
has the highest dividend payout on average when compared to 33 other countries. In order to
correctly proxy for a firm’s target payout ratio special dividends and imputation credits are
excluded. One-off income statement items which may misattribute earnings are also avoided by
using normalized earnings. Including an average of DIVPAY in the form of DIVPAY3 and
DIVPAY5 also reduces possible noise within the data.
4.4 Explanatory Variables
Ownership Structure
Three variables BODOWN, INST and BLOCK are used to determine the effect of different
ownership structures on dividend policy and internal governance relation. BODOWN is
expected to be positively associated with stronger monitoring of management. Dividend policy is
expected to be less important in reducing agency costs as BODOWN increases. INST and
BLOCK are external ownership variables. A large block holder will be more incentivized to
monitor the performance and activities of the company because of the size of the investment.
Reddy et al. (2010) report strong evidence of increased monitoring at the level of blockholdings
increases and an associated reduction in agency costs (similar to Shleifer and Vishny, 1988).
INST should increase the level and quality of firm monitoring. Crane et al. (2016) report that
high institutional ownership significantly increases the dividends paid. The effect is stronger for
firms with high agency costs.
4.5 Internal Governance Indices
Original Indices
We construct a corporate governance index to test the effect of corporate governance on
dividend policy for publically listed NZ firms. The index helps to prevent variable interactions
from distorting results.3 CEO_IND uses CEOREMUM, CEOBOD and CEOCHAIR to
measure the influence a firm’s CEO has upon the board and remuneration committee. BD_IND
represents board size, the number of executive directors and the number of busy directors.
These two indices proxy for the strength of internal governance used in equation (1) and
equation (2). As a check on robustness of our results we include two alternative indices for
CEO_IND and BD_IND. The indices are explained in detail in Table 1.
4.6 Control Variables
The seven control variables are selected to control for any influence that they may have on
dividend policy, or alternatively, they are viewed as proxies for agency costs. PGROWTH is the
five-year geometric mean for past growth in total sales. Firms that have experienced high growth
historically are less willing to pay out dividends compared to firms with lower growth. MB is the
market-to-book ratio of equity. As a firm’s growth opportunities increase, the opportunity cost
of paying out cash to shareholders increases. Firms with higher opportunity costs will have lower
dividend payout on average (Smith and Watts, 1992). LEVERAGE is the ratio of book value of
total debt to book value of total assets. As a firm takes on more leverage the dividend payout will
decrease.4 SIZE is the natural logarithm of firm market capitalization. Larger firms have a higher
dividend yield on average however they also experience higher agency costs. Dividend policy
may be used to align the interests of managers and shareholders. ROA is the three-year mean
ratio of after-tax earnings to total assets. We expect a positive relation between ROA and
dividend payout.
DISPERS is defined as the 100 percentile of holdings minus the top five non-custodial holdings.
Firms with more dispersed shareholders are likely to have greater agency costs and higher
dividend payout to alleviate these costs. CORP measures the number of takeover bids upon a
company in the last five years. The variable proxies for cross-sectional variation between external
disciplining factors and their potential effects on dividend policy.
5. Empirical Results
5.1 Logistic Model Analysis
Table 5 reports the results for the logistic regression on the pooled sample for the period 2004 to
2012 as stated in equation (1). Each model includes year dummies. All the models are statistically
3 John and Knyazeva (2006), Kowalewski et al. (2008), Bae, Chang and Kang (2012) and numerous others report a governance index is optimal to us as a proxy for corporate governance. We model our two indices upon the INT_GOV index used in John and Knyazeva (2006). 4 Smith and Watts (1992) and Crane et al., (2016) hypothesise that as leverage is predominant in larger firms, and larger firms usually have a higher payout, there may be a positive relation between leverage and dividend payout.
significant at the 1% level. The highly significant control variables, LEVERAGE, ROA, SIZE,
MB and PGROWTH are all associated with a firm’s propensity to pay dividends. Models (1) and
(3) report a marginally significant, positive coefficient for the BD_IND variable lending partial
support for Hypothesis Ib. As board governance increases the firm is more likely to pay a
dividend. This is consistent with the managerial entrenchment hypothesis (Farinha, 2003; Brown
and Caylor, 2004).
[Insert Table 5 here]
5.2 Ordinary Least Squares Analysis
Panels A and B of Table 6 report the coefficients for the ordinary least squares regression model
given by equation (2). Each model includes year dummies. All the models are highly significant.
Panels A and B report significant positive coefficients for both CEO_IND and BD_IND.5
These are consistent with firms demonstrating stronger governance pay higher dividends. The
finding is consistent with Hypothesis IIb.
[Insert Table 6 here]
BODOWN, BODOWN2 and BODOWN3 are all significant in the majority of the DIVPAY5
models and marginally significant in the DIVPAY3 models. The signs on the coefficients are
negative, positive and negative, respectively. This result is consistent with work by Morck et al.
(1988), Beiner et al., (2006) and Farinha et al., (2009).6 The estimated turning points in the model
are 25.4% - 26.3% and 53.5% - 55.6%. These findings suggest that for beneficial director share
ownership below 26%, the benefits associated with the alignment to shareholder interests may
exceed the private consumption benefits and shirking behavior of management. Between 26%
and 56% beneficial director ownership the relationship is positive, consistent with managerial
entrenchment. Dividends act as a compensating factor to offset the higher agency costs (Farinha,
2003). Without dividends the agency benefits associated with perquisite consumption and
shirking (that ultimately destroy shareholder wealth) can exceed the agency costs of such actions.
When the level of beneficial director share ownership exceeds 56% the relationship is again
negative. Director and shareholder interests are aligned again and dividend policy is not required
as a monitoring device. The negative relation is consistent with the substitution hypothesis (John
and Knyazeva, 2006). Another explanation is that as managers become more insulated, the
dividend payout and propensity decreases, consistent with agency theory. Paying dividends
5 Similar results are also found using the alternate indices CEO_IND1 and BD_IND1. 6 Farinha et al., (2009) reports that for firms with an Anglo-Saxon tradition the relation between dividends and insider ownership follows the pattern negative-positive-negative.
increases the rate at which the firm must seek capital from the external markets, which also
decreases cash that can be used for private consumption by managers. Evidence from
antitakeover legislation shows that this behavior is more prevalent in poorly governed firms
(Francis et al., 2011).
The significant negative BLOCKINST coefficient indicates that external ownership is an
effective monitor that can reduce the need to pay high dividends (Shleifer and Vishny, 1986).
The negative relationship also provides support for the managerial entrenchment hypothesis
(Morck et al., 1988). The significant positive BLOCKINST*BD_IND interaction term shows
that firms with strong board governance and higher levels of external ownership pay higher
dividends. Consistent with the results from the logit analysis, ROA and PGROWTH are highly
significant. Profitability is associated with higher dividend payout and higher growth prospects
are associated with lower dividends (Smith and Watts, 1992; Rozeff, 1982).
5.3 Robustness Checks
Our results do not adjust for potential heteroscedasticity in the error terms. While graphs of the
residuals do not indicate any deviations from the underlying assumptions for the models we
verify our results using estimations for the regression models that control for heteroscedasticity.
The results are remarkably similar to those already reported. Following Thompson (2011), when
sample sizes are small (such as for our sample), it is possible to find statistically significance even
when it does not exist. Hence we do not include firm level clustering or clustering over time. To
do so would be adding unnecessary bias into the analysis.
We also run an alternative regression model to estimate equation (2) using five principal
components based on the control variables. The results are shown in Table 7. Consistent with
the results reported in Table 6, the CEO_IND and BD_IND coefficients are positive and
significant. However the beneficial director ownership coefficients are only significant for some
of the DIVPAY5 models reported in Panel B of Table 7.The turning points for the models are
between 17.5% - 19% and 55.7% - 58.2%, with the same signs as the estimation in Table 6. The
results support the strong, positive relation between the level of dividend payout and strong
board governance and external ownership.
[Insert Table 7 here]
Finally we run a Tobit regression censored from below to account for possible bias in the
regression model due to the number of firms that do not pay dividends (23% of our sample).
The estimation is reported in Table 8. Consistent with the regression results in Tables 6 and 7
there is evidence of a significant positive relation with CEO_IND and BD_IND. Better
corporate governance in terms of less influential CEOs and better governed boards are
associated with higher levels of dividends. The coefficients for beneficial director share
ownership (BOD_OWN) are in the same direction and highly significant for the DIVPAY5
model, in particular. The turning points are 24.0% - 25.4% and 43.1% - 45.4%.
[Insert Table 8 here]
The BLOCKINST, BLOCKINST*BD_IND, ROA and PGROWTH coefficients are all
consistent with the earlier estimations reported in Table 6. Consistent with Smith and Watts
(1992) and Rozeff (1982), MB is significant and negative. Firms with higher growth
opportunities are likely to pay lower dividends.
6. Conclusion
This study examines the relationship between the propensity to pay and the level of dividend
payout for publicly listed NZ firms. The NZ market provides an interesting, previously untested
setting to explore the governance-dividend payout relationship. The market for corporate control
in NZ is much less active than in overseas markets and, as a result may have a weaker
disciplining effect on managers. In addition, the market for managerial labour is small and highly
transparent. On the one hand, the disciplining mechanism provided by the managerial labour
market may be stronger in such an environment. Conversely, managers may feel secure in their
jobs knowing that the pool for managerial talent is small and restricted.
The NZ market may also have weaker internal governance. There is a small pool of director
talent, and firms often contain complex cross holdings and interlocked directorships. This can
mean that directors serve on multiple boards, which may weaken their capacity to act
independently in the best interests of respective shareholders. Moreover, investments which are
not value maximizing may be endorsed by busy directors who are privy to information from
multiple board meetings and affiliations.
Several legislative changes may have strengthened NZ’s internal governance environment. In
1993, the new Companies Act came into effect, raising the standard of responsibility for
directors. Mandatory public disclosure of CEO compensation was introduced in 1997.
Furthermore, the amendments brought about by the New Zealand Stock Exchange in 2003 were
also designed to improve the quality of corporate governance in NZ publicly listed firms.7 It is
also worth noting that the NZ dividend imputation tax credit system means that, at the intra-
market level, the firm’s dividend policy is not affect by tax. Given New Zealand’s (NZ) climate
of strong investor protection, we examine if there is still a reliance on dividends to substitute for
poor corporate governance.
We find strong evidence of a relation between internal governance and the likelihood of a NZ
publically listed firm paying a dividend. Moreover, there is evidence to suggest that the level of
dividend payout is strongly related to the firm’s internal corporate governance, beneficial director
ownership and being privy to both strong board governance and external ownership. An
important finding in this study is the level of dividends being significantly and non-linearly
related to beneficial director ownership. Consistent with work by Farinha et al., (2009) we report
a negative-positive-negative pattern at director ownership levels of 26% and 56%.8 For beneficial
director ownership less than 26%, there is a negative relation suggesting that decreasing agency
costs from increased director-shareholder alignment offset the need for higher dividend
payments. Beneficial director ownership levels between 26% and 56% exhibit a significant
positive relationship consistent with managerial entrenchment. Higher agency costs associated
with entrenchment can be mitigated through higher levels of dividends (Farinha, 2003).
Beneficial director ownership exceeding 56% results in the relationship becoming significantly
negative again. When directors own higher proportions of a firm’s equity, their alignment with
shareholder wealth increases and there is less need to use dividend policy to align director and
shareholder interests.
Our findings also show that NZ firms with strong board governance and low levels of CEO
influence tend to have higher levels of dividend payout. The propensity to pay dividends is also
marginally related to stronger board governance. External ownership is found to be negatively
related to the level of dividend payout, consistent with the idea that there is a significant
monitoring ability present. According to Morck et al. (1988) the negative relation provides
empirical support for the managerial entrenchment hypothesis. Considering external ownership
and good board governance jointly shows a very strong positive relation with the level of
7 These became mandatory in 2004 under the Best Practice Code. 8 The turning points reported in Farinha and Lopez-de-Foronda (2009) for the Anglo-Saxon sample consisting of the USA, UK and Irish firms were 36% and 95% during the period 1996 – 2000.
dividend payout. These findings indicate that in the presence of strong board governance,
external blockholders have the ability to force higher levels of dividends.
Future research may wish to examine in detail the impact of the Companies Act 1993 and its
various amendments and determine its effect on the dividend propensity and dividend payout
levels in NZ. We report preliminary evidence from this study of a shift towards a stronger
corporate governance environment, but there is no steadfast empirical evidence of a causal link
to the Companies Act 1993. While Hossain et al., (2001) do look at the Act their study examines
the relation between firm performance and the board. It does not investigate dividend policy.
The results of such research will be useful for regulators to use as a measure for both the
effectiveness and the response time of related legislation.
P a g e | 5
References
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Table 1. Variable Definitions
Dependent Variables
DIV Dummy variable that takes the value of one if the firm pays a dividend and zero otherwise.
DIVPAY3 The mean ratio of total ordinary cash dividends paid to normalized earnings during the previous three years.
DIVPAY5 The mean ratio of total ordinary cash dividends paid to normalized earnings during the previous five years.
Explanatory Variables
CEOCHAIR Dummy variable that takes the value of one if the CEO is chairman of the board and zero otherwise.
CEOBOD Dummy variable that takes the value of one if the CEO is a member of the board and zero otherwise.
CEOREMUN Dummy variable that takes the value of one if the CEO is a member of the remuneration committee and zero otherwise.
BDSIZE The total number of directors on a firm’s board.
BUSY The percentage of directors with three or more directorships.
INSIDE The percentage of inside director on the board. Inside directors are defined as executive directors.
BLOCK
The common stock ownership of the largest non-institutional blockholder. A non-institutional blockholder is defined as any person(s), company, or other entity (such as a city council or government department) with ownership of at least 5% of total ordinary shares that does not fit the definition of an institutional holder.
INST
The common stock ownership of the largest institutional blockholder. An institution is defined as any investment bank, investment fund, insurance group, or mutual fund likely to actively trade their position with ownership of at least 5% of total ordinary shares.
BLOCKINST The summation of block shareholdings and institutional shareholdings.
BODOWN The total beneficial stock ownership held by directors and associated persons as a proportion of the total value of common equity.
CORP The number of takeover bids on a company in the previous five years.
Variables for BD_IND
INVBDSIZE The maximum number of board directors in the sample minus the actual number of directors for the firm, divided by the maximum number of board directors in the sample
NONINSIDE 1-proportion of inside (INSIDE) directors on the board. NONBUSY 1-proportion of busy (BUSY) directors on the board.
Original Indices
CEO_IND (3-C)/3 where C represents the sum of the dummy variables CEOBOD, CEOREMUN, and CEOCHAIR and is a value between 0 and 1. A higher value of CEO_IND should indicate a potentially less influential CEO.
BD_IND
(12-BD)/12, where BD is the board governance index constructed as follows. Observations are sorted into quartiles for each of the following new variables: INVBDSIZE, NONINSIDE, and NONBUSY. Each firm year observation is assigned a value of 1, 2, 3, or 4 depending on which quartile it ranks in for each variable (1 for the top quartile and 4 for the
lowest quartile). For each firm, the assigned values of each new board structure variable are summed to give the score BD. Higher values of BD_IND indicate better governance.
Alternate Indices
CEO_IND1
This variable takes the value of 1 if the CEO is not a director (CEOBOD=0), and zero otherwise. A value of one for this index indicates potentially stronger governance and a value of zero indicates weaker governance. This is based upon the rationale that a CEO who is a member of a board may have considerable influence over the board and its decisions. CEOREMUN is not included in this definition of governance.
BD_IND1
(300-BD)/300, where BD is the board governance index constructed as follows. Each of the following variables: INBDSIZE, NONINSIDE, and NONBUSY are multiplied by 100. For each firm, BD is assigned the sum of these values. Lower values of BD_IND1 indicate potentially better governance.
Control Variables
LEVERAGE Book value of total debt to book value of total assets.
ROA The three-year mean ratio of after-tax earnings to total assets.
CORP The number of takeover bids for a company in the last five years.
SIZE The natural logarithm of the firm’s market capitalization.
MB The ratio of market-to-book value of equity and is a proxy for growth opportunities.
PGROWTH The five-year geometric mean of past growth in total sales.
DISPERS 100% - the top five non-custodial shareholdings.
Table 2. Summary Statistics
This table reports the mean, median, maximum and minimum values for each of the variables used in the study. All of the variables are defined in Table 1. The pooled sample contains 563 firm-year observations.
Observations Mean Median Std. Dev. Min Max
Dependent Variables DIV 563 0.799 1.000 0.401 0.000 1.000
DIVPAY3 536 0.526 0.525 0.420 0.000 1.414
DIVPAY5 540 0.490 0.477 0.380 0.000 1.210
Main Explanatory Variables
CEOREMUN 563 0.110 0.000 0.313 0.000 1.000
CEOBOD 563 0.664 1.000 0.473 0.000 1.000
CEOCHAIR 563 0.018 0.000 0.132 0.000 1.000
BDSIZE 563 6.073 6.000 1.569 3.000 12.000
BUSY 563 0.614 0.667 0.300 0.000 1.000
INSIDE 563 0.171 0.167 0.149 0.000 0.667
BLOCK 563 0.277 0.191 0.252 0.000 0.970
INST 563 0.057 0.000 0.087 0.000 0.805
BLOCKINST 563 0.334 0.264 0.238 0.000 0.970
BODOWN 563 0.157 0.037 0.213 0.000 0.919
Internal Governance Indices
CEO_IND 563 0.736 0.667 0.217 0.000 1.000
CEO_IND1 563 0.336 0.000 0.473 0.000 1.000
BD_IND 563 0.431 0.417 0.151 0.083 0.750
BD_IND1 563 0.454 0.475 0.122 0.091 0.756
Control Variables
LEVERAGE 563 0.442 0.411 0.343 0.000 1.410
ROA 563 0.008 0.051 0.155 -0.507 0.161
CORP 563 0.215 0.000 0.560 0.000 3.000
SIZE 563 11.730 11.778 1.715 7.219 16.281
MB 563 2.319 1.653 2.003 0.460 8.216
PGROWTH 563 0.126 0.062 0.242 -0.169 0.939
DISPERS 563 0.599 0.655 0.266 0.046 0.990
Table 3. Pearson Correlation Coefficients The sample includes all NZ publicly listed firms from 2004-2012 based on available data. The variables are defined as in Panel A and in the Appendices. Pairwise correlations that are significant at the 5% level have been identified by **. The correlations are based on 563 observations.
[1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11] [12] [13] [14] [15] [16] [17] [18] [19] [20] [21]
[1] CEOREMUN 1.00
[2] CEOBOD 0.25** 1.00
[3] CEOCHAIR 0.00 0.10** 1.00
[4] BDSIZE -0.07 0.14** -0.03 1.00
[5] BUSY -0.05 -0.119** 0.03 0.11** 1.00
[6] INSIDE 0.13** 0.61** 0.06 -0.01 -0.13** 1.00
[7] BLOCK 0.07 -0.26** 0.03 -0.14** 0.06 -0.01 1.00
[8] INST -0.07 0.00 -0.07 0.05 0.09** -0.02 -0.32** 1.00
[9] BLOCKINST 0.04 -0.27** 0.01 -0.13** 0.10** -0.02 0.94** 0.02 1.00
[10] BODOWN -0.11** 0.08 0.12** -0.15** -0.16** 0.25** 0.09** -0.03 0.08** 1.00
[11] CEO_IND -0.66** -0.86** -0.27** -0.06 0.11** -0.52** 0.15** 0.05 0.18** -0.03 1.00
[12] CEO_IND1 -0.25** -1.00 -0.10** -0.14** 0.12** -0.61** 0.26** 0.00 0.27** -0.08 0.86** 1.00
[13] BD_IND 0.00 -0.40** -0.06 -0.59** -0.50** -0.48** 0.06 -0.08 0.04 -0.02 0.30** 0.40** 1.00
[14] BD_IND1 -0.02 0.21** 0.04 0.49** 0.82** 0.29** -0.01 0.09** 0.02 -0.09** -0.15** -0.21** -0.85** 1.00
[15] LEVERAGE 0.00 0.03 0.00 -0.06 0.14** 0.01 -0.18** 0.08 -0.17** 0.03 -0.02 -0.03 -0.03 0.09** 1.00
[16] ROA 0.04 0.15** -0.07 0.27** 0.28** 0.11** 0.18** -0.01 0.18** 0.00 -0.11** -0.15** -0.34** 0.38** -0.11** 1.00
[17] CORP -0.13** -0.18** 0.01 0.06 0.27** -0.11** 0.13** 0.11** 0.18** 0.01 0.19** 0.18** -0.14** 0.21** -0.06 0.07 1.00
[18] SIZE 0.02 0.17** -0.04 0.56** 0.29** -0.01 -0.05 0.11** -0.02 -0.26** -0.12** -0.17** -0.41** 0.46** -0.09** 0.41** 0.11** 1.00
[19] MB -0.02 0.16** 0.06 -0.06 -0.19** 0.11** -0.25** 0.03 -0.25** 0.01 -0.12** -0.16** 0.03 -0.14** 0.01 -0.29** -0.12** 0.13** 1.00
[20] PGROWTH 0.07 0.16** 0.23** -0.10** -0.10** 0.17** -0.12** 0.01 -0.12** 0.24** ,-0.19** -0.16** -0.01 -0.05
0.00 -0.26** -0.08** -0.11** 0.29** 1.00
[21] DISPERS 0.09** 0.35** -0.01 0.08 -0.03 0.16** -0.75** 0.15** -0.74** -0.18** -0.29** -0.35** -0.12** 0.07 0.19** -0.07 -0.13** 0.15** 0.22** 0.06 1.00
Table 4. Beneficial Director, Institutional and Blockholder Shareholder Statistics In this table we report the statistics and results of a t test for difference of means for the breakdown of firms where there are only blockholders (BLOCK>0, INST=0), only institutional holders (BLOCK=0, INST>0), blockholders and institutional holders (BLOCK>0, INST>0), and where there are neither (BLOCK=0, INST=0). For Panel A B and C; the significance is in regards to the base case of where there are both blockholders and institutions present. For Panel D; the significance is in regards to the difference on Panel B and Panel C. We report figures for SIZE (natural log of market capitalisation), DIV (proportion of firms paying a dividend), the mean payout of DIVPAY3 and DIVPAY5, BODOWN (proportion of shares held beneficially by directors), CEO_IND (ownership level of CEO), BD_IND (board governance), and the holdings of both Institutional (INST) and blockholders (BLOCK). *** Indicates Significance at 1%, ** Indicates Significance at 5%, * Indicates Significance at 10%
Panel A: All Firms
Panel B: Dividend Paying Firms
Panel C: Non-Dividend Paying Firms
Panel D: Difference of Means
Block=0 INST=0 (N=17)
Block=0 INST>0 (N=78)
Block>0 INST=0 (N=289)
Block>0 INST>0 (N=179)
Block=0 INST=0 (N=14)
Block=0 INST>0 (N=65)
Block>0 INST=0 (N=233)
Block>0 INST>0 (N=138)
Block=0 INST=0 (N=3)
Block=0 INST>0 (N=13)
Block>0 INST=0 (N=56)
Block>0 INST>0 (N=41)
Block=0 INST=0 (N=17)
Block=0 INST>0 (N=78)
Block>0 INST=0 (N=289)
Block>0 INST>0 (N=179)
SIZE 11.77 12.94 11.26 11.96 11.92 13.27*** 11.45*** 12.45 11.07 11.28** 10.47 10.31 0.85 1.99*** 0.97*** 2.15***
DIV = 1 (%) 82.35 83.33** 80.62 77.09
Mean DIVPAY3 0.34 0.56* 0.56** 0.47 0.44** 0.66 0.73*** 0.63
Mean DIVPAY5 0.33 0.49 0.53*** 0.44 0.41** 0.58 0.68*** 0.59
BODOWN (%) 6.78* 4.76*** 18.56 16.57 4.29** 4.68*** 16.35 15.55 18.43 5.19** 27.74* 19.98 -14.14*** -0.51 -11.39*** -4.43
CEO_IND 0.75 0.63*** 0.74 0.77 0.71 0.61*** 0.75 0.77 0.89 0.72 0.73* 0.79 -0.17 -0.11** 0.05 -0.02
BD_IND 0.51*** 0.37** 0.46*** 0.41 0.51*** 0.35** 0.45*** 0.39 0.53 0.45 0.50 0.49 -0.02 -0.10*** -0.05** -0.10***
INST (%)
15.23***
11.31 12.54***
10.10 28.68***
15.39
-16.14***
-5.29***
BLOCK (%)
38.08*** 25.49
42.49*** 25.75
19.73* 24.62
22.76*** 1.13
BLOCKINST (%)
15.23*** 38.08 36.81 12.54*** 42.49*** 35.86 28.68* 19.73*** 40.01 -16.14*** 22.76*** -4.15
Table 5. Logistic Model This table reports the regression output for the logit models fitted over the data for the pooled data sample of 563 observations from 2004 to 2012. The coefficients are reported first with the corresponding standard error in grey beneath each estimate. The control variables are PGROWTH = the five-year geometric mean of past growth in total sales, MB = the ratio of the market-to-book value of equity and is a proxy for growth, LEVERAGE = the ratio of the book value of total debt to the book value of total assets, SIZE = the natural logarithm of market capitalization, ROA = the three-year mean ratio of after-tax earnings to total assets, DISPERS = 100% minus the sum of the top five noncustodial holdings, and CORP = the number of takeover bids on a company during the previous five years. CEO_IND measures the influence of the CEO. Higher values of CEO_IND indicate a potentially less influential CEO, and better governance. BD_IND is the board governance index. Higher values indicate better governance. BODOWN measure the percentage of shares held beneficially by the board of directors. BLOCKINST measures the percentage of shares held by BLOCK and INST owners, these investors represent the external shareholders of the firm. CEO_IND1 measures CEO influence. CEO_IND1 takes the value one if the CEO is not a director and zero otherwise. A value of one for CEO_IND indicates a potentially less influential CEO. BD_IND1 is an alternative board governance index. Higher values of BD_IND1 indicate better governance. *** Significant at 1%, ** Significant at 5%; * Significant at 10%.
MODEL 1 2 3 4 5
INTERCEPT -3.189 -1.661 -2.326 -1.014 -1.779
2.222 1.820 2.316 1.928 2.399
CEO_IND -1.247
-1.317
-1.203
0.916 0.947 0.956
BD_IND 2.537*
2.395*
0.958
1.331 1.366 2.521
CEO_IND1
-0.118
-0.141 0.429 0.444
BD_IND1
-2.405
-2.226 1.676 1.698
BODOWN 1.012 -0.461 1.857 0.492 -0.508
5.995 5.938 6.044 6.001 6.373
BODOWN2 5.918 10.205 3.370 6.945 3.256
19.766 19.749 20.405 20.449 20.815
BODOWN3 -15.017 -18.394 -13.576 -16.200 -13.348
16.746 16.809 17.732 17.829 18.305
BLOCKINST -0.697 -0.821 -9.759 -9.744 -10.367
1.258 1.219 6.654 6.611 7.407
BLOCKINST2
26.093 26.722 28.738
17.614 17.486 18.128
BLOCKINST3
-19.990 -21.023 -21.955
13.503 13.392 13.960
BODOWNBD_IND
5.528
4.697
BLOCKINSTBD_IND
-0.275
5.117
LEVERAGE 2.535*** 2.613*** 2.667*** 2.790*** 2.600***
0.852 0.858 0.892 0.899 0.901
ROA 15.239*** 15.094*** 15.758*** 15.639*** 15.470***
2.135 2.107 2.249 2.218 2.349
CORP 0.469 0.384 0.590 0.517 0.689
0.419 0.424 0.440 0.449 0.468
SIZE 0.366*** 0.350** 0.351** 0.331** 0.335**
0.138 0.140 0.138 0.140 0.145
MB -0.296*** -0.295*** -0.306*** -0.303*** -0.295***
0.101 0.100 0.101 0.101 0.104
PGROWTH -2.643*** -2.510*** -2.574*** -2.442*** -2.534***
0.676 0.671 0.684 0.680 0.682
DISPERS -1.138 -1.113 -1.141 -1.114 -0.926
1.045 1.017 1.051 1.028 1.078
Year Dummies YES YES YES YES YES
Number of obs. 563 563 563 563 563
Pseudo R² 0.564 0.560 0.568 0.564 0.571
Likelihood Ratio -123.005*** -124.221*** -121.937*** -123.074*** -121.173***
Table 6. OLS Regression Results This table reports the regression output for the four OLS models fitted over the pooled data sample of 563 observations from 2004 to 2012. Panel A reports the results for the models fitted using the dependent variable DIVPAY3. Panel B reports the results for the models fitted using the dependent variable DIVPAY5. The coefficients are reported first with the corresponding standard error in grey beneath each estimate. Year dummy variables are included in the estimated models. The control variables are PGROWTH = the five-year geometric mean of past growth in total sales, MB = the ratio of the market-to-book value of equity and is a proxy for growth, LEVERAGE = the ratio of the book value of total debt to the book value of total assets, SIZE = the natural logarithm of market capitalization, ROA = the three-year mean ratio of after-tax earnings to total assets, DISPERS = 100% minus the sum of the top five noncustodial holdings, CORP = the number of takeover bids on a company during the previous five years. CEO_IND measures the influence of the CEO. Higher values of CEO_IND indicate a potentially less influential CEO, and better governance. BD_IND is the board governance index. Higher values indicate better governance. BODOWN measure the percentage of shares held beneficially by the board of directors. BLOCKINST measures the percentage of shares held by BLOCK and INST owners, these investors represent the external shareholders of the firm. *** Significant at 1%, ** Significant at 5%; * Significant at 10%.
Panel A: DIVPAY3 Panel B: DIVPAY5
MODEL 1 2 3 4 5 6 7 8
INTERCEPT 0.230 0.353* 0.146 0.271 0.295* 0.415** 0.232 0.354**
0.193 0.197 0.196 0.201 0.169 0.171 0.171 0.175
CEO_IND 0.186** 0.198*** 0.181** 0.190** 0.190*** 0.209*** 0.204*** 0.217***
0.077 0.076 2.330 0.077 0.067 0.066 0.068 0.067
BD_IND 0.289** -0.257 0.293** -0.196 0.236** -0.343* 0.204** -0.303*
0.117 0.202 2.470 0.204 0.102 0.175 0.104 0.177
BODOWN -0.858* -0.929* -0.949* -0.998* -0.963** -1.007** -0.963** -1.023**
0.477 0.510 -1.960 0.514 0.414 0.441 0.418 0.443
BODOWN2 2.439 2.991* 2.255 2.864* 2.811** 3.358** 2.260 2.898**
1.625 1.615 1.360 1.649 1.412 1.393 1.427 1.418
BODOWN3 -2.173 -2.637* -1.803 -2.359* -2.505** -2.969** -1.829 -2.419**
1.395 1.386 -1.270 1.421 1.215 1.199 1.231 1.225
BLOCKINST -0.298*** -0.950*** 0.530 -0.151 -0.330*** -1.022*** 0.064 -0.603
0.101 0.209 0.930 0.601 0.087 0.177 0.489 0.513
BLOCKINST2 -1.296 -1.328 0.235 0.069
-0.820 1.580 1.349 1.346
BLOCKINST3
0.409 0.577
-0.891 -0.591
0.330 1.254 1.060 1.061
BODOWNBD_IND -0.145 -0.166 -0.200 -0.143
0.441 0.444 0.383 0.386
BLOCKINSTBD_IND 1.538***
1.410***
1.644***
1.447***
0.429 0.435 0.366 0.373
LEVERAGE -0.064 -0.063 -0.030 -0.036 -0.073 -0.067 -0.029 -0.036
0.070 0.071 -0.420 0.072 0.062 0.061 0.062 0.062
ROA 1.292*** 1.108*** 1.298*** 1.130*** 1.188*** 0.991*** 1.189*** 1.015***
0.117 0.126 11.170 0.126 0.103 0.110 0.102 0.110
CORP 0.014 0.015 0.016 0.015 0.002 0.003 0.008 0.007
0.027 0.027 0.570 0.027 0.024 0.024 0.024 0.024
SIZE 0.013 0.022* 0.011 0.019 0.011 0.020* 0.008 0.016
0.011 0.012 0.980 0.012 0.010 0.010 0.010 0.010
MB 0.006 0.002 0.007 0.003 0.006 0.002 0.008 0.004
0.009 0.009 0.860 0.009 0.008 0.008 0.007 0.008
PGROWTH -0.295*** -0.304*** -0.303*** -0.310*** -0.282*** -0.292*** -0.287*** -0.294***
0.068 0.067 -4.460 0.067 0.059 0.058 0.059 0.058
DISPERS -0.139 -0.117 -0.133 -0.116 -0.202*** -0.177** -0.187** -0.168**
0.087 0.087 -1.520 0.088 0.076 0.076 0.076 0.076
Year Dummies YES YES YES YES YES YES YES YES
Number of obs. 536 536 536 536 540 540 540 540
Adjusted R² 0.357 0.370 0.362 0.373 0.395 0.416 0.406 0.421
F 15.12*** 14.68*** 14.20*** 13.72*** 17.76*** 17.68*** 16.99*** 16.65***
Table 7. Robustness Check: OLS Regression Estimated Using Principal Components This table reports the regression output for the four OLS models fitted over the pooled data sample of 563 observations from 2004 to 2012 using principal components for the control variables. Panel A reports the results for the models fitted using the dependent variable DIVPAY3. Panel B reports the results for the models fitted using the dependent variable DIVPAY5. The coefficients are reported first with the corresponding standard error in grey beneath each estimate. Year dummy variables are included in the estimated models. The control variables are PGROWTH = the five-year geometric mean of past growth in total sales, MB = the ratio of the market-to-book value of equity and is a proxy for growth, LEVERAGE = the ratio of the book value of total debt to the book value of total assets, SIZE = the natural logarithm of market capitalization, ROA = the three-year mean ratio of after-tax earnings to total assets, DISPERS = 100% minus the sum of the top five noncustodial holdings, CORP = the number of takeover bids on a company during the previous five years. CEO_IND measures the influence of the CEO. Higher values of CEO_IND indicate a potentially less influential CEO, and better governance. BD_IND is the board governance index. Higher values indicate better governance. BODOWN measure the percentage of shares held beneficially by the board of directors. BLOCKINST measures the percentage of shares held by BLOCK and INST owners, these investors represent the external shareholders of the firm. *** Significant at 1%, ** Significant at 5%; * Significant at 10%.
Panel A: DIVPAY3 Panel B: DIVPAY5
MODEL 1 2 3 4 5 6 7 8
INTERCEPT 0.211** 0.504*** 0.131 0.428*** 0.191** 0.480*** 0.135 0.426***
0.087 0.107 0.098 0.119 0.076 0.092 0.086 0.103
CEO_IND 0.187** 0.208*** 0.183** 0.200*** 0.199*** 0.230*** 0.214*** 0.237***
0.077 0.076 0.078 0.077 0.068 0.066 0.068 0.067
BD_IND 0.352*** -0.369* 0.361*** -0.324 0.299*** -0.436** 0.273** -0.415**
0.119 0.202 0.121 0.205 0.104 0.176 0.106 0.179
BODOWN -0.441 -0.615 -0.519 -0.673 -0.587 -0.748* -0.560 -0.737*
0.482 0.507 0.490 0.513 0.420 0.439 0.425 0.443
BODOWN2 1.452 2.518 1.335 2.506 1.911 2.939** 1.388 2.569*
1.650 1.628 1.685 1.669 1.439 1.407 1.462 1.440
BODOWN3 -1.479 -2.336* -1.211 -2.207 -1.871 -2.703** -1.267 -2.283*
1.419 1.399 1.453 1.438 1.241 1.212 1.264 1.245
BLOCKINST -0.255*** -1.129*** 0.496 -0.440 -0.262*** -1.136*** -0.001 -0.867*
0.096 0.198 0.582 0.605 0.084 0.169 0.504 0.518
BLOCKINST2
-1.292 -1.362
0.391 0.105
1.623 1.600 1.392 1.368
BLOCKINST3
0.532 0.756
-0.884 -0.463
1.288 1.270 1.094 1.078
BODOWNBD_IND
-0.326
-0.359
-0.321
-0.290
0.440 0.443 0.383 0.387
BLOCKINSTBD_IND
2.060***
1.996***
2.073***
1.964***
0.410 0.414 0.352 0.357
PC1 -0.164*** -0.150*** -0.161*** -0.150*** -0.152*** -0.138*** -0.147*** -0.135***
0.014 0.014 0.014 0.014 0.012 0.012 0.012 0.012
PC2 0.076*** 0.074*** 0.079*** 0.076*** 0.062*** 0.061*** 0.066*** 0.063***
0.017 0.016 0.017 0.016 0.014 0.014 0.014 0.014
PC3 -0.001 0.000 -0.006 -0.003 -0.004 -0.003 -0.009 -0.006
0.015 0.015 0.015 0.015 0.013 0.013 0.013 0.013
PC4 -0.048*** -0.040** -0.046 -0.040** -0.0525*** -0.044*** -0.046*** -0.041***
0.016 0.016 0.016 0.016 0.014 0.014 0.014 0.014
PC5 0.033* 0.018 0.033* 0.018 0.034** 0.019 0.034** 0.019
0.019 0.020 0.019 0.020 0.017 0.017 0.017 0.017
Year Dummies YES YES YES YES YES YES YES YES
Number of obs. 536 536 536 536 540 540 540 540
Adjusted R² 0.3249 0.354 0.328 0.354 0.360 0.398 0.367 0.399
F 14.55*** 14.96*** 13.41*** 13.76*** 16.96*** 17.98*** 15.85*** 16.59***
Table 8. Robustness Check: Tobit Regression Results This table reports the regression output for the four OLS models fitted over the pooled data sample of 563 observations from 2004 to 2012 using principal components for the control variables. Panel A reports the results for the models fitted using the dependent variable DIVPAY3. Panel B reports the results for the models fitted using the dependent variable DIVPAY5. The coefficients are reported first with the corresponding standard error in grey beneath each estimate. Year dummy variables are included in the estimated models. The control variables are PGROWTH = the five-year geometric mean of past growth in total sales, MB = the ratio of the market-to-book value of equity and is a proxy for growth, LEVERAGE = the ratio of the book value of total debt to the book value of total assets, SIZE = the natural logarithm of market capitalization, ROA = the three-year mean ratio of after-tax earnings to total assets, DISPERS = 100% minus the sum of the top five noncustodial holdings, CORP = the number of takeover bids on a company during the previous five years. Higher values indicate better governance. BODOWN measure the percentage of shares held beneficially by the board of directors. BLOCKINST measures the percentage of shares held by BLOCK and INST owners, these investors represent the external shareholders of the firm. *** Significant at 1%, ** Significant at 5%; * Significant at 10%.
Panel A: DIVPAY3 Panel B: DIVPAY5
1 2 3 4 5 6 7 8
INTERCEPT 0.013 0.119 -0.086 0.015 0.141 0.241 0.076 0.173
0.237 0.240 0.239 0.244 0.199 0.200 0.200 0.203
CEO_IND 0.214** 0.224** 0.225** 0.230** 0.228*** 0.242*** 0.262*** 0.269***
0.093 0.092 0.093 0.093 0.079 0.078 0.079 0.078
BD_IND 0.421*** -0.077 0.393*** -0.040 0.332*** -0.216 0.260** -0.201
0.141 0.255 0.142 0.255 0.118 0.213 0.120 0.212
BODOWN -1.265** -1.309** -1.283** -1.342** -1.420*** -1.405*** -1.323*** -1.359***
0.602 0.625 0.604 0.625 0.511 0.528 0.509 0.526
BODOWN2 4.487** 4.762** 3.840* 4.199* 4.926*** 5.226*** 3.916** 4.320**
2.164 2.149 2.164 2.163 1.856 1.827 1.845 1.833
BODOWN3 -4.638** -4.830** -3.790* -4.085** -4.921*** -5.128*** -3.810*** -4.147**
1.957 1.939 1.952 1.947 1.698 1.667 1.684 1.670
BLOCKINST -0.407*** -0.931*** 0.273 -0.166 -0.423*** -1.026*** -0.363 -0.839
0.122 0.250 0.687 0.714 0.102 0.205 0.566 0.585
BLOCKINST2 -0.370 -0.606 1.511 1.189
1.873 1.875 1.532 1.533
BLOCKINST3
-0.513 -0.241
-1.978* -1.611
1.472 1.476 1.196 1.201
BODOWNBD_IND -0.041 -0.020 -0.194 -0.087
0.529 0.529 0.444 0.444
BLOCKINSTBD_IND
1.283**
1.123**
1.480***
1.236***
0.528 0.532 0.434 0.438
LEVERAGE 0.093 0.096 0.159 0.152 0.084 0.098 0.163* 0.161*
0.103 0.103 0.106 0.106 0.086 0.085 0.088 0.087
ROA 3.465*** 3.224*** 3.495*** 3.282*** 2.718*** 2.463*** 2.740*** 2.524***
0.313 0.320 0.312 0.321 0.223 0.228 0.222 0.228
CORP 0.033 0.033 0.038 0.036 0.013 0.012 0.021 0.019
0.031 0.031 0.031 0.031 0.027 0.026 0.026 0.026
SIZE 0.017 0.025* 0.013 0.020 0.013 0.022* 0.007 0.015
0.014 0.014 0.014 0.015 0.012 0.012 0.012 0.012
MB -0.023* -0.027** -0.021* -0.025** -0.019*** -0.023** -0.016 -0.020**
0.012 0.013 0.012 0.013 0.010 0.010 0.010 0.010
PGROWTH -0.603*** -0.610*** -0.618*** -0.623*** -0.581*** -0.590*** -0.590*** -0.595***
0.103 0.103 0.103 0.103 0.087 0.086 0.086 0.086
DISPERS -0.184* -0.156 -0.148 -0.128 -0.232*** -0.204** -0.189** -0.170*
0.106 0.107 0.106 0.107 0.090 0.090 0.089 0.089
Year Dummies YES YES YES YES YES YES YES YES
Number of obs. 536 536 536 536 540 540 540 540
Pseudo R² 0.464 0.471 0.472 0.477 0.558 0.573 0.574 0.584
log likelihood -239.275*** -236.242*** -235.770*** -233.47 -175.392*** -169.617*** -169.380*** -165.352***